Do You Need a Credit Card in Canada?

Credit cards can be both a blessing and a curse. On the plus side, they provide a convenient way to buy what you need while offering protection that cash doesn’t.

However, they can also lead to serious debt issues. In fact, more than half (55%) of adult Canadians admit that they currently have credit card debt, which amounted to an average credit card balance of $4,265 in 2023, according to TransUnion Canada.

This raises an interesting question: Do you need a credit card?

The truth is, you don’t necessarily need one. You can use cash, cheques, debit cards, or prepaid cards and still build a good credit history through other types of loans. Cash works for in-person purchases, and debit cards from your bank offer convenience similar to credit cards, including online shopping, without the debt risk. Yet, living without a credit card still has its challenges.

So, before you decide whether you need to get your first credit card, let’s weigh the pros and cons of having a credit card and explore the ways you can live without one.

Pros of having a credit card

Having a credit card offers many benefits, such as convenience, the ability to build your credit quickly, extra protection, and the bonus of rewards.

Convenience

Having a credit card in your wallet means you’ve always got access to money. Need to buy something? As long as it’s within your credit limit, you’re good to go. Credit cards, like debit cards, also save you from carrying around cash.

But while a debit card only lets you spend what’s in your account, a credit card gives you extra funds from your lender that you can pay back later. Do you really need to purchase something today, but you don’t get paid until Friday? That’s not a problem with a credit card.

Easier to build credit

Using a credit card responsibly is one of the best ways to boost your credit score, opening many doors for you. Your credit score is what lenders use to determine if you’re a reliable borrower. It shows that you repay borrowed money on time. It makes it easier to find housing, whether you’re renting or you’re applying for a mortgage.

Your credit history can also affect your rates with cell phone providers, insurance agents, and utility companies. It can even improve your chances of getting a job. Having a credit card can quickly contribute to building your credit score as long as you use it responsibly and make regular, on-time payments.

Protection

If you lose your wallet or get robbed, any cash you had is likely gone for good. But if thieves use your credit cards, you usually won’t be held responsible for those fraudulent charges. It might take some time to resolve everything, but you won’t lose your money. This is because many credit cards offer various protections.

Fraud protection ensures you get your money back if your card is stolen or hacked. Purchase protection reimburses you for damaged or stolen items. Collision protection covers rental car insurance. Some cards even offer cell phone insurance for damaged or stolen phones.

Rewards

Many credit cards offer perks just for using them. You can earn things like Airpoints, which can be used to buy flight tickets, or cashback, which means you get actual money back on your purchases.

If you use your credit card often, these rewards can add up quickly, giving you a nice bonus. Some cards even offer extra perks like access to airport lounges, roadside assistance, and priority access to concerts and sports events.

Cons of having a credit card

While there are many benefits to having a credit card, there are some downsides to consider.

Debt

It’s so easy to spend with a credit card—sometimes too easy. The convenience and easy access to money can quickly lead to overspending. In fact, studies show that people usually spend more when they use credit cards compared to using cash. As long as you make regular repayments, you should be fine.

But if you use your credit card irresponsibly, it can lead to spiralling debt. Interest and late fees can quickly add up and become overwhelming. It’s crucial to be disciplined and only spend what you can pay back each month.

Easy to damage credit

While using a credit card responsibly can help build your credit history, the downside is that it can hurt your credit if you misuse it. Lenders report your credit activity to the credit bureaus every month.

Borrowing a lot and missing regular payments can seriously damage your credit score. A poor credit history can make it harder to get future loans, mortgages, rental properties, and even new credit cards.

Extra costs

Credit cards often come with high interest rates, making borrowing expensive if you carry a balance each month. Purchases usually have an interest-free grace period for full repayment, but once that period ends, interest kicks in. If you don’t pay off your balance within that grace period (usually 3-6 weeks), you’ll end up spending more than if you had used cash.

Additionally, credit cards may come with various fees. There is often an annual fee just to have the card. Other fees include cash advance fees, late fees, international transaction fees, and other penalties if you’re not careful with your spending.

Alternatives to credit cards

Living without a credit card might seem tough, given how common they are, but it’s definitely possible. If you do most of your shopping in person, you can simply pay with cash.

However, since our society heavily relies on cards, you’ll still need a card for convenience. Luckily, there are great alternatives to credit cards, such as debit cards and prepaid cards.

Debit card

Debit cards are a convenient alternative to cash or checks. Issued by your bank, they are linked directly to your checking or savings account.

Many debit cards allow you to make in-store and online purchases, just like a credit card. Plus, they allow you to withdraw cash from ATMs when needed.

Unlike credit cards, where you borrow money and pay it back later, debit cards let you spend only the money you already have in your bank account. For example, if you spend $200 on groceries or new clothes, that amount is immediately deducted from your account.

While it’s possible to overdraw slightly, your bank will stop transactions once you hit your overdraft limit, making it more difficult to overspend like you can with a credit card. Though overdraft limits and fees vary by bank, you can often avoid them with overdraft protection. This way, you won’t risk overspending thousands by maxing out a credit limit.

One downside of using a debit card instead of a credit card is that most debit cards don’t offer the same rewards or benefits. Credit cards often give you perks like cash back, points, or miles that can be redeemed for merchandise, groceries, gift cards, travel, and more. Another downside is using your debit card won’t help you build credit like with your own credit card.

Prepaid card

Prepaid cards are a mix of debit and credit cards. They work like debit cards because you use your own money to pay for things and can withdraw cash from ATMs. You can even have your paycheck directly deposited onto one.

They’re similar to credit cards because they’re accepted by many merchants, both online and in person, as major companies like Mastercard or Visa often back them.

However, unlike debit cards, prepaid cards aren’t linked to your bank account. Instead, you load a specific amount of money onto the card, setting your spending limit. You can use the card until the money runs out, and then you’ll need to reload it to continue using it.

This means that, like debit cards, prepaid cards don’t carry the risk of credit card debt because you’re only spending the money you’ve loaded onto the card.

Most prepaid cards don’t offer many rewards or perks, but some, like KOHO, do. The KOHO prepaid virtual card offers up to 6% cash back on in-store and online purchases. Plus, the KOHO app can help you track and budget your money more effectively.

Also, like debit cards, prepaid cards don’t help you build credit—unless you have the KOHO prepaid virtual card. For just $5, $7, or $10 a month, depending on the plan you choose, you can sign up for KOHO’s Credit Building tool and watch as your credit score increases as you make your on-time monthly payments. Plus, you can monitor your score with KOHO’s free credit score checks.

How to live without a credit card

So, as we’ve said, it’s entirely possible to live without a credit card. With options like the prepaid card from KOHO, you can even build your credit without one.

Now, is it always easy to live without a credit card? No. But it’s certainly manageable. Here are a few tips to help you live without a credit card while still building credit.

1. Create a monthly budget

Credit cards can make it hard to see how much money we really have because of their postponed payments and grace periods. Living without credit cards might actually make budgeting simpler. Budgeting helps us be intentional about our spending and puts us in control.

Credit cards can tempt us to spend money we don’t have yet, since charges aren’t due until the end of the billing period. Without credit cards, having a budget and sticking to it becomes essential to avoid overdrafting your account or running out of cash. It’s important to track your spending to stay on target and keep an eye on rising costs.

2. Save up for emergencies

Credit cards are great for emergencies, but what do you do if you don’t have one? You create an emergency fund. An emergency fund is money you set aside for those unexpected expenses that pop up. At some point, you’ll probably face an emergency or an unplanned situation, and these surprises usually don’t give you time to adjust your budget.

For example, say you get into a car accident tomorrow and need $500 to pay your insurance deductible. That’s what your emergency fund is for.

With the budget you created from our first tip, be sure to include money you put away each month to build up your emergency fund.

3. Apply for a personal loan

Personal loans can be a great way to build credit without using a credit card. Making on-time payments helps improve your credit score. However, before taking out a personal loan, ensure you can afford the monthly payments, as missing them will hurt your credit score.

Personal loans can have higher APRs, especially if you have limited credit history or past defaults, but they can help you establish a solid credit foundation. While not all personal loans are easy to qualify for, there are options for those with limited or poor credit. You could also consider applying for a credit builder loan.

4. Use a credit-building program

Credit-building programs, like secured credit cards and credit builder loans, can help you build or rebuild your credit by using money as collateral and giving you a chance to improve your credit history.

These programs let you demonstrate that you can make regular, on-time payments, which is crucial since your payment history is the most important factor for your credit score. By consistently making on-time payments, your credit score will improve.

With a credit builder loan, like KOHO’s Credit Builder tool, making regular, on-time payments shows that you can manage credit responsibly. KOHO then takes that responsible payment history and reports to Equifax Canada, helping to improve your credit report. With KOHO, see your credit scores go up by 22 points on average after just three months.

5. Don't ditch the card, just ditch the habit

If you’ve decided to live without credit cards, consider cutting up your existing cards or hiding them without closing the accounts. Keeping your credit card accounts open shows your credit history, which is a key factor in calculating your credit score. As long as a card is open, it contributes to your history. But if you cancel a card that you’ve paid on time for years, your credit age will decrease.

Also, closing a credit card can affect your credit utilization ratio, which is the ratio of your outstanding balances to your total credit limit. A low utilization ratio positively impacts your credit score, while a high ratio can have a negative effect. So, if you’ve decided to stop using credit cards, consider keeping them open.

The bottom line

It’s definitely possible to get by without a credit card. Whether you prefer using cash, a debit card, or a prepaid card, there are plenty of alternatives. However, having a credit card for emergencies or significant purchases might be worth considering. If your main concern is overspending, create a monthly budget and stick with it as best you can.